De-Friending Uncle Sam

5/23/2012

Facebook’s initial public offering hit the market like tickets to the season’s hottest concert. Shares opened at $38, unlocking billions in new wealth for founders and early investors.  

Taxes played a lead role in Facebook’s IPO. Founder Mark Zuckerberg and the company itself may both enjoy incredible tax benefits for years to come from his exercise of stock options. But one Facebook founder may have taken an even more drastic step to avoid tax – it’s been alleged that he actually renounced his American citizenship in order to not pay more taxes!  

Eduardo Saverin, who was born in Brazil, became a U.S. citizen in 1998. He met Zuckerberg while the two were students at Harvard and became Facebook’s first investor. After being squeezed out, he sued Zuckerberg and settled out of court for what appears to be something between 2% and 4% of the company – worth as much as $4 billion.  

Americans like Saverin who give up their citizenship do actually pay an “exit tax” on the value of appreciated assets as of the time they leave. Essentially, this means they are taxed as if they sold everything the day before they surrender their U.S. passport. In Saverin’s case, that means he pays based on the pre–IPO value when he left in September – but he avoids tax on any appreciation after that date. This could mean hundreds of millions in savings. And where has Saverin settled? Singapore, where he has lived since 2009, and where the tax on capital gains is zero.  

Saverin is hardly the first American to de–friend Uncle Sam. The IRS publishes a quarterly list of Americans who leave, one that totaled 1,781 in 2011. And, while Saverin denies he left to avoid taxes, outrage has grown over his move. Senators Chuck Schumer (D–NY) and Bob Casey (D–PA) have even introduced legislation that would punish future Saverins – their so–called “Ex–Patriot Act” (“Expatriation Prevention by Abolishing Tax–Related Incentives for Offshore Tenancy”) would impose a 30% tax on future expatriates’ gains after they leave our shores.  

Capital gains and appreciation/depreciation of property are tricky to navigate come tax time, and are common targets in tax audits. Before you file, make sure you fully understand what types of income you must report and how your investments affect the bottom line of your tax return.